UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
RELEASE No. 37730 / September 26, 1996
ACCOUNTING AND AUDITING ENFORCEMENT
RELEASE No. 826 / September 26, 1996
ADMINISTRATIVE PROCEEDING
File No. 3-9102
______________________________
In the Matter of : ORDER INSTITUTING PROCEEDINGS
: PURSUANT TO SECTION 21C OF
ADVANCED MICRO DEVICES, : THE SECURITIES EXCHANGE ACT
INC. : OF 1934, MAKING FINDINGS AND
: IMPOSING CEASE-AND-DESIST
: ORDER
I.
The Commission deems it appropriate that public
administrative proceedings be instituted pursuant to Section 21C
of the Securities Exchange Act of 1934 ("Exchange Act") against
Advanced Micro Devices, Inc. ("AMD" or the "Company").
II.
In anticipation of the institution of these administrative
proceedings, AMD has submitted an Offer of Settlement ("Offer")
which the Commission has determined to accept. AMD, solely for
the purpose of these proceedings and any other proceeding brought
by or on behalf of the Commission or to which the Commission is a
party, without admitting or denying any of the findings herein
(except that AMD admits to the jurisdiction of the Commission
over it and over the subject matter of these proceedings),
consents to the issuance of this Order Instituting Proceedings
Pursuant To Section 21C of the Securities Exchange Act Of 1934,
Making Findings and Imposing Cease And Desist Order ("Order").
==========================================START OF PAGE 2======
III.
On the basis of this Order and AMD's Offer, the Commission
finds the following:
A. Respondent
AMD, a Delaware corporation headquartered in Sunnyvale,
California, is a manufacturer of integrated circuits, commonly
known as computer chips. AMD reported revenues of $2.13 billion
and net income of $40,759,000 for the fiscal year ended
December 25, 1994. AMD's common stock is registered with the
Commission pursuant to Section 12(b) of the Exchange Act and is
listed on the New York Stock Exchange.
B. Summary
This matter involves inaccurate and misleading statements
made by AMD to the public concerning its development in a "clean
room" of a 486 microprocessor which would be fully compatible
with Intel Corporation's ("Intel") 486 microprocessor. Beginning
in June 1992 and continuing through August 1993, AMD led the
public to believe that it was independently designing the
microcode for its 486 microprocessor without access to Intel
microcode when, in fact, AMD had provided its engineers in the
"clean room" with Intel's copyrighted 386 microcode to accelerate
the Company's development efforts.1/
AMD made these statements via press releases and filings
with the Commission, as well as during conferences with industry
analysts. The press releases containing the statements were
disseminated to the public. Many were also incorporated in AMD's
Form 8-K reports filed on December 15, 1992, April 22, 1993, and
June 7, 1993. In addition, the Management's Discussion and
Analysis of Results of Operations and Financial Condition
("MD&A") sections of AMD's Form 10-K report for its fiscal year
ended December 27, 1992 and its Form 10-Q reports for its
quarters ended March 28, 1993 and June 27, 1993 failed to
disclose AMD's use of the Intel 386 microcode.
On September 2, 1993, AMD issued a press release disclosing
for the first time that its "clean room" engineers had been given
Intel's 386 microcode and that some portion of Intel's 386
microcode was probably incorporated into AMD's 486 microcode.
The following day, AMD announced that it had intentionally
exposed its engineers to Intel's 386 microcode in order to
accelerate the development process and that approximately 25% or
600-700 lines of AMD's Am486 microcode were "substantially
similar" to Intel's copyrighted 386 microcode. Following these
1/ Microcode is the set of instructions inside a
microprocessor
that controls its functions.
==========================================START OF PAGE 3======
disclosures, AMD's common stock fell from 31 to 27 5/8, a price
decline of over 10.8%, on unusually heavy trading volume.
AMD's conduct violated Sections 10(b) and 13(a) of the
Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13
thereunder.
C. Facts
1. Background
AMD designs, develops, and markets complex monolithic
integrated circuits for use by manufacturers of a broad range of
electronic equipment and systems. In 1976, AMD entered into a
contract with Intel that gave AMD a license to certain Intel
patents and microprocessor microcode copyrights (the "1976
Agreement").
In the early 1980's, IBM introduced its first personal
computer. Its design subsequently became the industry standard
in the personal computer market. IBM's choice of Intel's x86
microprocessor for its personal computer, in turn, made Intel's
x86 microprocessor architecture a market standard, guaranteeing
future sales of the x86's progeny as well.
To ensure price competition and a steady source of supply,
IBM wanted Intel to license its technology to another company to
allow that company to serve as a second source of microprocessors
for IBM. Consequently, in February 1982, Intel and AMD entered
into a technology exchange agreement ("the 1982 Agreement")
pursuant to which AMD agreed to become a second source
manufacturer of Intel's x86 microprocessors and related computer
chips. As part of a complex exchange of products and royalties,
Intel provided AMD with database tapes for the 8086, 80186 and
80286 computer chips that contained all of the information
necessary to produce copies of Intel's microprocessors. Instead
of producing chips of its own design, AMD became a second source
of Intel's x86 family of microprocessors. The 1982 Agreement
extended the 1976 Agreement until 1996.
The relationship between the two companies deteriorated over
the next several years. In April 1987, AMD petitioned the
California Superior Court to compel arbitration of the parties'
disputes arising out of the 1982 Agreement. Shortly thereafter,
Intel gave notice of termination of the agreement. The Superior
Court subsequently granted AMD's petition to compel arbitration
(the "Arbitration"). The Arbitration would last for four and
one-half years.
After Intel terminated the 1982 Agreement, it stopped
providing AMD with database tapes for its new x86 products. To
remain in the marketplace, AMD, relying on the license in the
1976 Agreement, began to reverse-engineer Intel's new
==========================================START OF PAGE 4======
microprocessors and co-processors.2/ In 1990, AMD successfully
reverse-engineered Intel's 287 math co-processor.3/ AMD's 287
computer chip, although not an exact replica of Intel's math co-
processor, contained a bit for bit copy of Intel's copyrighted
287 microcode. Intel immediately responded with a federal
copyright action alleging that AMD did not have a license to copy
Intel's microcode (the "287 Microcode Litigation"). AMD claimed
that the 1976 Agreement, as extended in 1982, gave it a right to
copy all Intel microcodes.
In 1991, AMD introduced a reverse-engineered 386
microprocessor, the Am386. While the Am386 microprocessor
contained a circuitry layout that differed from Intel's, it also
contained an exact copy of Intel's copyrighted microcode. Intel
immediately reacted with another copyright action - once again
challenging AMD's right to manufacture any computer chips
containing Intel's copyrighted microcode (the "386 Microcode
Litigation").4/
In February 1992, the arbitrator in the Arbitration issued
his ruling, finding that Intel had breached portions of the 1982
Agreement and awarding AMD a license to the Intel intellectual
property embodied in AMD's reverse-engineered 386 computer chip.
The arbitrator stated that the intent of the award was to allow
AMD to produce and sell its reverse-engineered version of Intel's
386 computer chip. The arbitrator, however, specified that he
was not expressing any opinion as to whether any Intel
intellectual property rights were incorporated in any of the
Am386 microprocessor family or whether any Am386 microprocessors
infringed any Intel intellectual property rights. On June 1,
1992, the arbitrator's award was confirmed by the Santa Clara
Superior Court, and Intel immediately appealed to the California
Court of Appeal.
While the arbitrator's decision represented an initial
success for AMD, the award protected only AMD's use of Intel 386
microcode contained in the then current version of the Am386. A
loss for AMD in any of the federal copyright actions could have
2/ Reverse engineering is the time consuming process of
disassembling a computer chip, studying its structure, and
using the knowledge so gained to re-engineer a functionally
compatible product. The reverse-engineered microprocessor
may have a different design layout but will perform the same
or equivalent functions as the original microprocessor.
3/ Although AMD's engineers had no access to Intel's database
tapes, they studied the Intel 287 chip design and micro-
architecture, and copied Intel's microcode.
4/ During 1991 and 1992, AMD in turn filed a federal antitrust
action and a state court business interference lawsuit
against Intel.
==========================================START OF PAGE 5======
exposed the company to liability for damages in the millions of
dollars. The federal copyright litigations all turned on the
interpretation of the 1976 Agreement. A verdict favorable to AMD
would permit AMD to copy all Intel x86 microprocessor microcodes
introduced before January 1, 1996. Conversely, an adverse
verdict would have barred AMD from copying any Intel microcodes
(except for the 386 microcode, which had been awarded in
arbitration).
2. AMD's Announcements Regarding Its Development of a
"Clean Room" Version of its 486 Microprocessor
In view of the uncertainty caused by the pending litigation,
AMD concluded that it was prudent to develop a fully compatible
version of Intel's 486 microprocessor that did not incorporate
Intel's copyrighted 486 microcode. At AMD's annual shareholders
meeting held on May 22, 1992, the Company disclosed that an
adverse verdict in the then ongoing 287 Microcode Litigation
would delay AMD's introduction of its reverse-engineered Am486
microprocessor inasmuch as the Company would have to develop an
"independently engineered microcode." At the same time, AMD
stated that it was confident that it could create a "clean room"
version of 486 microcode.
On June 17, 1992, the jury in the 287 Microcode Litigation,
returned a verdict holding that AMD did not have a license to
Intel's microcode and that AMD's 287 math coprocessor infringed
Intel's 287 microcode copyright. AMD's reverse-engineered 486
computer chip also incorporated a bit-for-bit copy of Intel's 486
microcode. As a result, the verdict, unless overturned, would
have precluded AMD from shipping Am486 microprocessors containing
copies of Intel 486 microcode.
Later that day, AMD issued a press release announcing that
while the verdict would delay the Company's entry into the 486
microprocessor market, it would not prevent AMD from competing in
the 486 marketplace. AMD stated "[w]e are fully confident that
we can produce a clean room version of microcode that will enable
us to build completely compatible products." This created the
impression in the marketplace that, unlike AMD's previously
reverse-engineered microprocessors, the "clean room version of
microcode" was to be developed without access to and study of
Intel microcode.
Immediately after the 287 Microcode Litigation verdict, AMD
embarked on a program designed to produce a clean room version of
486 microcode. The Company considered three approaches:
(1) licensed use of a third company's microcode; (2) an
externally staffed clean room without access to any Intel
==========================================START OF PAGE 6======
copyrighted microcode; or (3) an internally staffed clean room
with access to Intel's copyrighted 386 microcode.5/
AMD chose the latter alternative because it was considered
the "fastest, and best chance for success" in AMD's efforts to
develop a clean room 486 microcode and get its 486 microprocessor
to market. AMD projected that access to Intel's 386 microcode
would accelerate development of the 486 microcode by
approximately two months, thereby significantly increasing AMD's
revenues.6/
3. Management's Knowledge of the Clean Room's Use of
Intel's 386 Microcode
From the outset, AMD's senior management knew that the clean
room engineers would study Intel's 386 microcode to develop AMD's
486 chip. At an August 6, 1992 meeting, AMD's senior management
was advised that the "clean room" would be given access to
Intel's 386 microcode to expedite the Company's development of
the Am486 microcode. At a November 1992 meeting, AMD management
was informed that the 386 microcode had been delivered into the
clean room shortly after it opened in early October 1992 and that
the engineers had been instructed to "[f]low chart/understand 386
microcode." Thereafter, a January 29, 1993 memorandum informed
management that "[t]he clean room has the 386 microcode, and they
have studied it in detail."
4. AMD's Disclosures Regarding the Clean Room 486
Microcode -- December 15, 1992 through June 4, 1993
On December 2, 1992, AMD moved for judgment notwithstanding
the jury verdict in the 287 Microcode Litigation and a
declaration that AMD's copyright license extended to future
generations of Intel microcode. The Court denied AMD's motions.
That same day AMD issued a press release announcing that while
the Court's decision would cause a delay in the introduction of
its 486 microprocessors, the ongoing "[d]evelopment of an
independently derived microcode for the Am486 microprocessor
family" was a contingency plan that had been in place for some
time. The company reiterated its plans to introduce its Am486
microprocessors by mid-1993 but did not include a definition of
5/ While AMD believed that the arbitrator's decision gave the
Company a license to Intel's 386 microcode, Intel had
appealed the arbitration award and continued to allege
copyright infringement in both the 287 Microcode Litigation
and 386 Microcode Litigation.
6/ One Company forecast stated, "[e]very day that we can pull
in our 486 introduction into June 1993 is worth an
additional $1M in 1993 revenue. Incremental 486 capacity
from FAB XV available in early 1994 could be conservatively
worth an additional $100M in 1994 revenues."
==========================================START OF PAGE 7======
"independently derived" or mention the fact that AMD's clean room
engineers had been given access to Intel's 386 microcode.7/ A
copy of this December 2, 1992 News Release was attached as an
exhibit to AMD's Form 8-K filed with the Commission on
December 15, 1992.
On March 26, 1993, AMD filed its Form 1O-K for the fiscal
year ended December 27, 1992. While the MD&A contained broad,
general statements about possible uncertainties that might affect
AMD in the future, it contained no mention of AMD's actual use of
Intel 386 microcode to develop its clean room 486 microcode.8/
In the MD&A, AMD noted that its microprocessor business
accounted for approximately 35% of total sales, and acknowledged
that its future outlook and growth depended in part on the
successful introduction and market acceptance of its 486 computer
chip with AMD microcode. However, the company did not mention
the clean room's use of 386 microcode.
Similarly, AMD noted that unfavorable outcomes in the 287
Microcode Litigation and the 386 Microcode Litigation, "could
significantly impact the company's financial results in 1993."
AMD did not disclose, however, that given the clean room's access
to Intel 386 microcode to develop 486 microcode, adverse outcomes
in the 287 and 386 Microcode Litigations and a reversal of the
arbitration award in state court could adversely affect AMD's
ability to enter the 486 microprocessor market.
At an April 6, 1993 conference with securities analysts, in
response to a question about the originality of its clean room
microcode, AMD told attendees that "[w]e are absolutely confident
that we have an immaculate conception. So we're not worried at
all about the defensibility of our position." The clean room,
however, had used Intel 386 microcode as a guide to understanding
the functions the Am486 microcode needed to perform.
7/ As described below, in subsequent releases, Commission
filings and at meetings with analysts through August 1993,
AMD used a series of phrases, including "independently
derived," "clean room," "proprietary," "immaculate
conception," and "independently developed," to describe its
486 microcode. However, in none of these releases, filings
or meetings did the Company disclose that its engineers had
been given access to Intel's 386 microcode.
8/ The MD&A section for this Form 10-K report incorporated by
reference the MD&A section in AMD's 1992 Annual Report to
stockholders.
==========================================START OF PAGE 8======
On April 15, 1993, the judge in the 287 Microcode Litigation
granted AMD's motion for a new trial.9/ This decision lifted
the legal barrier that had prevented AMD from shipping Am486
microprocessors incorporating Intel microcode. On April 19th and
22nd, AMD issued press releases announcing the immediate shipment
of Am486 microprocessors with Intel microcode. The Company also
stated, however, that it had been developing "a `clean room'
microcode in order to achieve technological independence" and
that "members of the Am486 family incorporating the AMD microcode
will be announced on July 4, 1993--Independence Day." As was the
case in previous filings and press releases, AMD contrasted the
"AMD 486 chip with Intel microcode" with the "AMD 486 chip with
AMD's clean room microcode." The April 19, 1993 and April 22,
1993 press release were attached to a Form 8-K that AMD filed on
April 22, 1993.10/
On May 11, 1993, AMD filed its Form 10-Q for the quarter
ended March 28, 1993. In its Form 10-Q, AMD reiterated the
importance of its microprocessor business, which represented more
than 31 percent of total sales for the current quarter. The
Company stated that despite recent legal developments allowing it
to ship Am486 microprocessors with Intel microcode, it would
"continue development of its clean room microcode in order to
achieve technological independence from Intel" and that it
expected to introduce its 486 microprocessor with AMD microcode
in the second half of 1993. AMD stated that its future prospects
were "highly dependent on x86 market conditions," and that the
"successful introduction and market acceptance of both the Am486
with Intel microcode and the Am486 with AMD microcode" were
critical to its future growth. The Company made no reference as
to how the clean room's access to the Intel 386 microcode might
affect pending or potential litigation with Intel and the
introduction of the Am486 microprocessor with the AMD microcode.
5. AMD's Disclosures Regarding the Clean Room 486
Microcode -- June 4, 1993 through September 2, 1993
On June 4, 1993, California's Sixth District Court of Appeal
reversed the arbitrator's award granting AMD a license to any
Intel intellectual property contained in the Am386
microprocessor. Later that day, AMD issued a press release
discussing the impact of the Court's opinion. The press release,
9/ On March 10, 1994, a jury in the retrial of the 287
Litigation returned a verdict in favor of AMD.
10/ On April 28, 1993, Intel filed a new federal lawsuit,
alleging that both AMD's Am486 microprocessor containing
Intel 486 microcode and the yet-to-be-introduced Am486
containing clean room microcode infringed Intel's 486
microcode copyrights. Among other things, Intel alleged
that AMD's clean room failed to prevent access to Intel 486
microcode.
==========================================START OF PAGE 9======
however, made no mention that AMD had provided Intel's 386
microcode to the clean room or that the Court of Appeal's
decision, if not overturned, would remove one source of legal
authority for doing so. In addition, during a June 22, 1993
conference with analysts, an AMD spokesman stated that "this
[appellate decision], incidentally, has no impact on our 486
business." The June 4, 1993 News Release was attached as an
exhibit to AMD's Form 8-K filed on June 7, 1993.11/
Despite the Court of Appeal's reversal, AMD went forward
with its "Independence Day" announcements. On July 6, 1993, the
Company issued a press release introducing its Am486
microprocessor incorporating "proprietary" microcode developed by
AMD. This press release went through at least ten revisions, but
it still did not disclose the clean room's access to disputed
intellectual property or discuss the possible impact of the
arbitration reversal on the clean room's product.12/
Later that day during a telephonic press conference, AMD
described the product as representing "AMD's technological
independence at the 486 level," and as having AMD's "own derived
microcode." Asked how AMD could prove that the microcode was
independently derived, AMD emphasized: (1) the extensive effort
AMD had undertaken to isolate the clean room engineers; (2) that
all material that had come in and out of the clean room had been
recorded; and (3) that the starting point did not include any
Intel microcode. Stressing the engineers' prior lack of
experience with Intel x86 products, the Company stated that no
one inside the clean room had worked on an x86 compatible product
before and that "the team inside the clean room were the `Intel
virgins,' so to speak."
11/ Shortly after the Appellate Court's opinion, AMD entered
into an agreement with an outside consultant to develop a
"squeaky clean" version of 486 microcode in an externally
staffed clean room. Unlike the first clean room program,
the objective of the second clean room program was to
develop a fully compatible 486 microcode, without access to
any Intel microcode.
12/ Various drafts of the press release demonstrate AMD's
awareness of the issue. The final version was revised to
omit any references to "independently developed" or
"independently derived" microcode. The phrase "microcode
derived independently by AMD" was revised to "microcode
developed by AMD." "Clean room Am486 microprocessor
microcode" was changed to "proprietary Am486 microprocessor
microcode." A statement - that AMD was technologically
independent at the 486 level - was removed from the final
version of the release but resurfaced in oral remarks at the
accompanying analysts' conference.
==========================================START OF PAGE 10======
On August 2, 1993, AMD filed its Form 10-Q for the second
quarter ended June 27, 1993. In the MD&A, AMD stated that
shipments of its 486 microprocessors incorporating microcode
developed by AMD would begin in the third quarter of 1993. The
company went on to state that its future growth was dependent on
market acceptance of both the Am486 microprocessor with Intel
microcode and Am486 microprocessor with AMD microcode. AMD,
however, did not reveal the clean room engineers' access to
Intel's 386 microcode.
AMD also noted that it had filed a Petition for Hearing with
the California Supreme Court seeking review of the Court of
Appeals' decision reversing the arbitration award. While the
Company warned that an adverse decision by the California Supreme
Court could, among other things, preclude AMD from selling Am386
microprocessors with Intel microcode, the Company did not mention
that an adverse decision might also create legal risks for the
Am486 microprocessors containing AMD's clean room microcode.
6. AMD's Corrective September 1993 Disclosures Result in
10.8% Drop in Stock Price
In late August 1993, AMD conducted an analysis of the
microcode and learned that 600 to 700 lines out of a total of
3300 of AMD's clean room 486 microcode appeared to be
substantially similar to lines of Intel's 386 microcode.
On September 2, 1993, AMD issued a press release that
combined positive news -- namely, that the Supreme Court had
agreed to review the appellate court ruling that overturned the
arbitrator's award of Intel's 386 intellectual property to
AMD13/ -- with the negative news that: (1) the AMD "engineers
responsible for developing the company's independently derived
Am486 SX microcode were exposed to Intel 386 microcode"; and
(2) "some portion of the 386 microcode was probably
incorporated."
In a conference call with analysts the following day, AMD
stated that: (1) it intentionally provided engineers with the 386
microcode "to ensure that we came to market quickly"; and
(2) approximately 25% or 600-700 lines of AMD's 486 microcode was
"substantially similar" to Intel's 386 microcode. For the first
time, AMD also acknowledged the existence of the second clean
13/ On December 30, 1994, the California Supreme Court reversed
the Court of Appeal's decision overturning the arbitrator's
award. Thereafter, AMD and Intel called a truce to their
long-standing litigation battles and entered into a global
settlement of all pending litigation. Under the terms of
the settlement, AMD received a license to manufacture and
sell 287, 386 and 486 microprocessors incorporating Intel
microcode.
==========================================START OF PAGE 11======
room and its ongoing effort to produce "squeaky clean" microcode.
On September 4, 1993, AMD's common stock fell 2 points; it
was the New York Stock Exchange's most active issue. On
September 7, 1993, after the Labor Day weekend had passed, AMD's
stock fell an additional 1 3/8 points on a volume of 2,239,000
shares. The cumulative drop of 3 3/8 points represented a price
decline of over 10.8%.
D. APPLICABLE LAW
1. Section 13(a) of the Exchange Act
a. AMD's Duty to File Accurate Reports
Section 13(a) of the Exchange Act requires all issuers whose
securities are registered pursuant to Section 12 of the Exchange
Act to file periodic and other reports containing such
information as the Commission by rule prescribes. Pursuant to
Section 13(a), the Commission has promulgated Rules 13a-1,
13a-11, and 13a-13, which require issuers to file with the
Commission annual, current and quarterly reports, respectively.
Courts have long held that the requirement to file periodic
and other reports pursuant to Section 13(a) necessarily includes
a requirement that the information contained in the reports be
true and correct. In other words, while Section 13(a) does not
specifically so state, all periodic reports filed with the
Commission under the Exchange Act must be accurate in all
material respects.
The Commission, by Rule, has expressly adopted the
requirement found by the courts to be implicit within Section
13(a). Rule 12b-20, promulgated under Section 13(a), requires
that reports filed under the Exchange Act contain, in addition to
disclosures expressly required by statute and rules, such other
information as is necessary to ensure that the statements made in
those reports are not, under the circumstances in which they are
made, misleading.
b. Management's Discussion and Analysis as Required
by Item 303 of Regulation S-K
In addition to the general obligation of full and accurate
disclosure imposed by the courts and Rule 12b-20, the Commission
has established specific disclosure requirements for annual and
quarterly reports on Forms 10-K and 10-Q. Among other things,
these reports must contain an MD&A section that includes the
information required by Item 303 of Regulation S-K. See Part I,
Item 2 of Form 10-Q and Part II, Item 7 of Form 10-K.
Item 303(a) of Regulation S-K (applicable to annual reports)
requires management to discuss the liquidity, capital resources,
and results of operations of the registrant and to "provide such
==========================================START OF PAGE 12======
other information that the registrant believes to be necessary to
an understanding of its financial condition, changes in financial
condition and results of operations." The registrant is to
discuss "any known trends ... or ... uncertainties that have had
or that the registrant reasonably expects will have a material
favorable or unfavorable impact on net sales and revenues or
income from continuing operations." Item 303(a)(1). "The
discussion and analysis shall focus specifically on material
events and uncertainties known to management that would cause
reported financial information not to be necessarily indicative
of future operating results." Instruction 3 to Item 303(a).
Registrants must discuss new matters which will have an impact on
future results and matters which have previously had an impact on
reported operations but which are not expected to have an impact
on-future operations. Id.
Item 303(b) of Regulation S-K (applicable to interim
reports, including quarterly reports) requires a discussion and
analysis of the results of operations to enable the reader to
assess material changes in financial condition and results of
operations that have occurred since the end of the preceding
fiscal year. Discussion of material changes in any of the areas
set forth in Item 303(a) is also required.
In 1989, the Commission interpreted a number of the
requirements for MD&A disclosure. See Release Nos. 33-6835,
34-26831, IC-16961, FR-36 (May 18, 1989) (hereafter "MD&A
Release"). Drawing on earlier releases, the MD&A Release
discussed the underlying rationale for requiring MD&A disclosure.
The Commission stated that without the MD&A's narrative
explanation, a company's financial statements and accompanying
footnotes
may be insufficient for an investor to judge the quality of
earnings and the likelihood that past performance is
indicative of future performance. MD&A is intended to give
the investor an opportunity to look at the company through
the eyes of management by providing both a short and
long-term analysis of the business of the company.
MD&A Release III.A (quoting Securities Act Release No. 6349
(September 28, 1981)). Since no two companies are identical,
"[t]he MD&A requirements are intentionally flexible and general."
MD&A Release IV.
The MD&A Release also set forth the following test for
determining when disclosure of prospective information is
required:
Where a trend, demand, commitment, event or uncertainty is
known, management must make two assessments:
(1) Is the known trend, demand, commitment, event or
uncertainty likely to come to fruition? If management
==========================================START OF PAGE 13======
determines that it is not reasonably likely to occur, no
disclosure is required.
(2) If management cannot make that determination, it must
evaluate objectively the consequences of the known trend,
demand, commitment, event or uncertainty, on the assumption
that it will come to fruition. Disclosure is then required
unless management determines that a material effect on the
registrant's financial condition or results of operations is
not reasonably likely to occur.
MD&A Release III.B. Where the test for disclosure is met,
"MD&A disclosure of the effects of the uncertainty, quantified to
the extent reasonably practicable, [is] required." Id.
2. Section 10(b) of the Exchange Act and Rule 10b-5
Thereunder
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder
prohibit making any untrue statement of material fact, or
omitting to state a material fact necessary in order to make the
statements made not misleading, in connection with the purchase
and sale of a security. A violation of Section 10(b) and Rule
10b-5 thereunder requires a showing of scienter.
E. ANALYSIS
In each instance that AMD undertook to make representations
to the public regarding its "clean room" operations, whether the
statements were made via press releases, conferences with
analysts, voluntary reports on Form 8-K or in mandatory reports
on Form 10-K or Form 10-Q, AMD had a duty to speak completely and
accurately. AMD did not do so.
As discussed below, because the sources of AMD's duty to
speak fully and accurately varied according to the type of
communication made, AMD's resulting violations of the federal
securities laws also varied. AMD's press releases and statements
made during conferences with analysts violated Section 10(b) of
the Exchange Act and Rule 10b-5 thereunder. In addition, AMD's
inaccurate filings with the Commission on Forms 8-K, 10-K and
10-Q violated Section 13(a) and Rules 12b-20, 13a-1, 13a-11, and
13a-13 thereunder.
1. AMD's Violations of Section 13(a) of the Exchange Act--
December 15, 1992 through August 2, 1993
AMD's reports on Forms 8-K, 10-K and 10-Q filed with the
Commission from December 15, 1992 through August 2, 1993 were
materially inaccurate. From December 15, 1992 to June 4, 1993,
AMD's filings led the public to believe that although the ongoing
litigation rendered AMD's ability to use Intel's intellectual
property uncertain, its "clean room" operations served as a
protection against a possible adverse decision in the ongoing
==========================================START OF PAGE 14======
litigation. From June 4, 1993 through August 2, 1993, AMD's
filings failed to disclose that due to the appellate court's
ruling, there was a substantial question as to whether the clean
room's use of the Intel 386 microcode would jeopardize AMD's
ability to sell the "486 chip with AMD microcode" without
violating Intel's 386 microcode copyright.
AMD's Form 8-K filed December 15, 1992 contained the press
release regarding the effect of the court's ruling in the 287
Microcode Litigation that AMD's copyright license did not extend
to Intel microcode. By characterizing the clean room's ongoing
"[d]evelopment of an independently derived microcode for the
Am486 microprocessor family" as a contingency plan that had been
in place for some time, AMD, in effect, represented that the
decision would only have the effect of delaying the introduction
of the 486 chip. By failing to include a definition of
"independently derived" or mentioning the fact that clean room
engineers had been intentionally exposed to Intel's 386
microcode, AMD overstated the protection that the clean room
approach afforded investors.
AMD's Form 10-K filed on March 26, 1993 (for the fiscal year
ended December 27, 1992) also failed to disclose the clean room's
use of Intel's 386 microcode in developing AMD's microcode for
its 486 chips. As discussed above, this uncertainty might have
had a "material unfavorable impact on net sales and revenues from
continuing operations" of a business division which accounted for
about 35 percent of total 1992 sales. The possibility that AMD's
486 microcode might have been tainted by the clean room's use of
Intel's 386 microcode was also a "matter that would have had an
impact on future operations and have not had an impact in the
past." Therefore, disclosure was required within the MD&A.
AMD's Form 8-K filed April 22, 1993 contained the press
releases of April 19th and 22nd stating that AMD had been
developing "a `clean room' microcode in order to achieve
technological independence" by July 4, 1993. These press
releases contrasted the "Am486 with Intel microcode" with the
"Am486 with the AMD microcode" when, in fact, the clean room 486
microcode was developed by engineers who had access to Intel 386
microcode.
AMD's Form 10-Q filed May 11, 1993 (for the quarter ended
March 28, 1993) failed to disclose the clean room's access to
Intel's 386 microcode and thereby precluded the reasonable
investor from assessing material changes in financial condition
and results of operations that had occurred since the end of the
preceding fiscal year. Disclosure of the clean room's access to
Intel's 386 microcode would have enabled the reasonable investor
to better assess the possible impact of the litigations on AMD's
operations and sales.
AMD's Form 8-K filed June 7, 1993 contained the June 4th
press release discussing the impact of the California's Sixth
==========================================START OF PAGE 15======
District Court of Appeal's opinion. The press release, however,
made no mention of the clean room's access to Intel's 386
microcode and the possible effect on AMD's efforts to compete in
the 486 market if the Court of Appeal's opinion became the final
decision in the case.
AMD's Form 1O-Q filed on August 2, 1993 (for the second
quarter ended June 27, 1993) claimed that shipments of its 486
microprocessors incorporating microcode developed by AMD would
begin in the third quarter of 1993. While the Company warned
that an adverse decision by the California Supreme Court could
preclude AMD from selling 386 microprocessors with Intel
microcode, the Company did not mention that, depending on the
outcome of other pending or potential litigation with Intel, an
adverse decision might preclude it from selling Am486
microprocessors with AMD's clean room microcode.
As of June 4, 1993, there was a substantial question as to
whether AMD had the right to use Intel's intellectual property
contained in AMD's reverse-engineered Am486 computer chip.
California's Sixth District Court of Appeal had reversed the
arbitrators award, which had granted AMD the right to use Intel
386 microcode. This reversal put into question whether AMD's
decision to give the clean room engineers access to Intel 386
microccode would cause AMD's "clean room" 486 microcprocessor to
infringe Intel's 386 copyrights. As discussed above, AMD's 8-K
filed on June 7, 1993, and its Form 10-Q filed on August 2, 1993,
failed to disclose this material litigation outcome uncertainty.
These filings constituted inaccurate statements to the public.
2. AMD's Violations of Section 10(b) of the Exchange Act
and Rule 10b-5 Thereunder - June 4, 1993 to September
2, 1993
AMD's statements made via press releases directly to the
public and during conferences with analysts were materially
misleading and support a finding of violations of Section 10(b)
and Rule 10b-5.14/ The June 4th and July 6th press releases
discussing the impact of the Court of Appeal's opinion did not
disclose the effect of the appellate court's decision on AMD's
efforts to compete in the 486 market, in light of the clean room
engineers' access to Intel's 386 microcode. AMD's failure to
disclose this fact and the resulting legal risks constitutes a
14/ It is well established under the federal securities laws
that statements made by an issuer to the general public -
whether via press releases or in conferences with analysts -
must be accurate in all material respects. All of the U.S.
Circuit Courts to address the issue have held that when an
publicly held company chooses to speak, it must do so
completely and truthfully and that failure to do so may
constitute a violation of Section 10(b) of the Exchange Act
and Rule 10b-5 thereunder.
==========================================START OF PAGE 16======
material omission. During its June 22nd conference with analysts
AMD inaccurately claimed that the Court of Appeal's decision "had
no impact" on AMD's 486 business. During its July 6th telephone
conference call with analysts, AMD overstated its "technological
independence at the 486 level" and inaccurately claimed that
"[t]he starting point for the 486 chip did not include any Intel
microcode."15/
AMD's commencement in June 1993 of the second clean room
without 386 microcode as a back-up or contingency underscored its
awareness of the risks associated with the clean room's use of
Intel's microcode. The revisions to AMD's July 6, 1993 press
release, none of which rose to the level of a corrective
disclosure, also demonstrate the Company's awareness of the
disclosure issues that the June 4th court decision presented.
Nonetheless, from June 4th through September 2nd, AMD continued
to overstate the legal protection the clean room approach
afforded the company.
F. FINDINGS
Based on the above, the Commission finds that AMD willfully
violated Sections 10(b) and 13(a) of Exchange Act and Rules 10b-
5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder
IV.
AMD has submitted an Offer of Settlement, in which, solely
for the purpose of these proceedings, or any other proceeding
brought by or on behalf of the Commission, or in which the
Commission may be a party, prior to a hearing pursuant to the
Commission's Rules of Practice, 17 C.F.R. 201.1 et seq., and
without admitting or denying any of the above, except that AMD
admits the jurisdiction of the Commission over it and over the
subject matter of these proceedings, AMD consents to the issuance
of this Order.
15/ As discussed above, AMD repeatedly used terms such as
"independently developed," "independently derived,"
"proprietary" and "clean room," to describe the purported
independence of AMD's development efforts. Even if each one
of these terms could be interpreted as fairly describing the
situation, their use was nevertheless misleading. Phrases
and terms, although literally accurate, can, through their
context and manner of presentation, act as devices which
mislead investors. For this reason, the disclosure required
by the federal securities laws is measured not by whether
some interpretation of a word or phrase can be viewed as
literally true, but by whether the reader is accurately
informed.
==========================================START OF PAGE 17======
V.
In view of the foregoing, the Commission deems it
appropriate and in the public interest to accept AMD's Offer and,
accordingly,
IT IS HEREBY ORDERED, pursuant to Section 21C of the
Exchange Act, that AMD cease and desist from committing or
causing any violation of, and committing or causing any future
violation of, Sections 10(b) and 13(a) of the Exchange Act and
Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 promulgated
thereunder.
By the Commission.
Jonathan G. Katz
Secretary